6/06/2012 @ 6:00PM

Hess Oil's Russian Mob Problem

EVEN BY RUSSIAN STANDARDS, Samara Oblast, a grim region 535 miles southeast from Moscow, is a dangerous place. There are four cities here. One of them, Togliatti, the countrys automaking capital, endured a six-year mafia killing spree that claimed more than 100 lives. A second city, Novokuibyshevsk (Novo, for short), boasts a collection of oil and gas refineries–and a powerful local mob organization known as Indeitsy, which is Russian for Indians, as in the raiding parties of Western lore.

After reviewing over 200 documents, and interviewing scores of local police officials, government investigators and oil executives over the past few months, FORBES has learned that Indeitsy controls the oil-industry rackets in Novo. The groups 400-odd members and associates (including 50 at the top) have created a lucrative niche for themselves by cutting into pipelines in ever more sophisticated ways and then trafficking in the stolen crude, as well as oil products and related plastics. This shouldnt come as a shock: Back in 1994 Boris Yeltsin called his country the superpower of crime, and little has changed since then. Far more surprising, though: Indeitsy has operated partly through what seems to be a clear affiliation with New York-based
Hess Corp.
, Americas seventh-largest oil company (2011 sales: $38 billion).

The Indeitsys dominant target: pipes belonging to state-controlled Rosneft, the countrys largest producer of crude. Rosneft produces some 180 million barrels of oil in the region each year–the local police have privately estimated that the Indeitsy makes at least $40 million annually by stealing from the companys pipes in the area. (The group has its tentacles elsewhere, too: Three alleged members were identified 1,000 miles away last year in connection with similar siphoning.) The Indeitsys main vehicle for achieving this, according to sources in the region on every side of the situation: subcontractors working for Hess, which bought a controlling stake in a local exploration-and-production entity named Samara-Nafta in 2005. Its not much different from the warehouse skimming you might see in The Sopranos or Goodfellas; the Hess subcontractors tell the Indeitsy when the coast is clear and then let their trucks suck deeply from the Rosneft straw.

This eyebrow-raising affiliation gets yet more uncomfortable. John Hess, CEO of the massive Hess Corp., meet Yuri Bochkarev, CEO of a smallish oil storage and transport company named Coral. For almost a decade, Bochkarev says, hes been fending off the Indeitsy mobs efforts to steal Coral from him. Their tactics are the corrupt business staples too common in the New Russia–armed takeovers, collusive litigation, commissioned criminal prosecutions, cases initialed by law enforcement for kickbacks–which are laid out in a 2010 paper, Armed Injustice, by the U.S. Justice Departments current legal attaché in Moscow.

From a purely criminal standpoint, writes the author, Thomas Firestone, one of Americas top experts on the Russian mob, such schemes are brilliant, since they apply legal window dressing and allow for misappropriating entire companies, rather than a cut of the action. Again, whats unusual is that these tactics lead, indirectly, back to Hess.

Nothing in Russia is ever simple, and this tale–complete with a missing gangster, savage beatings, the odd cocaine charges and the shooting of a Hess executive–exemplifies that. But the saga surrounding Indeitsy, Coral and Hess raises uncomfortable questions about the ability to conduct business in Russia–and what Hess is doing there.

INTRODUCING Alexey Veiman. According to a 2011 Samara police file on the local mob obtained by FORBES, Veiman, a 35-year-old lawyer, is heavily involved in Indeitsy–and may even be emerging as its leader. He is also a key executive at the Hess subsidiary in the region, as well as a political power broker said to be pondering a political career.

Until December 2009 Veiman was the CEO of a private company that was awarded at least 50% of Hess pipeline-construction contracts in Samara. At that point he sold the company (the 64-page police report, however, maintains that Veiman still controls the entity) and went to work for the head of the Hess subsidiary, Simon Kukes.

Earlier in his career Veiman worked as a chauffeur for Kukes, a Russian-American tycoon who previously served as the CEO of two of the countrys largest energy companies, Tyumen Oil (TNK) and Yukos Oil. At the latter he ­replaced the imprisoned Mikhail Khodorkovsky amid Vladimir Putins most notorious power grab. (A lawsuit filed against Kukes and others in 2011 in New York by a group of Canadian oil companies, Norex, revealed a CIA memo that states, TNK President Kukes said that he bribed local officials. Kukes vehemently denied it at the time. The lawyer who filed the case on behalf of Norex –Bruce Marks, a pioneer in litigation against Russian corruption — maintains that Kukes was involved in “one of the most hostile takeovers in Russia involving a force of armed guards,” which Kukes also disputes.) Kukes has run the Samara subsidiary since Hess took it over and is believed to own a 10% stake. Hess Corp. owns 85%; its unclear who owns the rest.

This Russian operation is incredibly important to Hess. Overall, the companys production–and profit–is down. Hess had $1.7 billion in net income last year–off 20%. In the first quarter of 2012 net income was $545 million, roughly half what it was a year ago. The companys cash flow has been negative for the past two years. The Samara venture, though, has been a bright spot since Hess entered the region in 2005. Figures for last year arent available, but in 2010 the Russian division showed earnings of about $122 million, up 48% from 2009, according to
Dun & Bradstreet
. And a few recent oil discoveries look very promising. Hess initial stake in the venture was 65%; over the past few years, as the division prospered, Hess upped its stake to the current 85%.

Over the exact same period that Hess has become a regional player, Boch­karevs Coral careened downhill. The mob is interested in his company, knowledgeable locals say, because its prime land lies within 300 feet of both the citys railway and Rosnefts refinery–a perfect tract for filching state oil.

This is where Veiman comes back in. Since 2005 Bochkarevs company has been repeatedly raided by mask-wearing police and private forces. A deputy who identified Veiman as one of the raiders was beaten with baseball bats and shot with rubber bullets, Bochkarev tells me. The deputy then quit the company. Veiman, reached on his cellphone, denies participating in any raid.

I pay my taxes. I have nothing to hide, Bochkarev tells FORBES. I was born in a simple working-class family. I do not pay kickbacks, which makes me a very inconvenient person. I pass through all the checks–be it tax inspections or police searches.

One of Bochkarevs employees, Inna Narykova, says shes lost count of all those inspections and searches, to the point where I cant tell who is government and who is a gangster. The companys chief accountant, Natalya Rybalko, recalls men in black masks holding 30 of the companys employees in a single room from 8 a.m. to 11 p.m. one day, threatening them all with prison: People here have been furiously beaten, weve had endless tax audits. Ive been afraid to go to work, but I cant leave my boss in that situation alone.

Bochkarev, ultimately, was arrested in 2010–and jailed for months–for possession of illegal guns and 45 grams of cocaine. While in prison, he says, a cell mate named Valery Plotnikov, an alleged Indeitsy member, told him his troubles would vanish if he simply gave up his land. Instead, Plotnikov himself vanished and has been missing for a year. (This is not a subject for the telephone, says Plotnikovs sister, Ekaterina, who adds that the investigators on her brothers case have changed so often that she no longer knows who is handling it.)

The criminal group trying to take Yuris company is supported by local government and local law enforcement, so its very difficult to break the wall, to get justice for Yuri, adds Bochkarevs attorney, Pavel Afanasyev. The whole of Russia is in the same situation. Afana­syev describes using his car to block an exit during a raid on Coral, only to see it torched later, with two buckets of gasoline left atop the car as a warning.

A vicious internal battle preceded this external war against Coral. Bochkarev says that a partner named Yuri Milov wanted to do shady deals with criminals involving the theft of oil and a falsified note to try to take control of the company. Aiding Milov in the latter effort, says Bochkarev: Alexey Veiman. Both Milov and Veiman deny the allegations. Veiman says he worked at a bank and the partners approached him for a loan. Milov tells FORBES that the fight stemmed from Bochkarevs attempt to take all the assets for himself.

Milov also claims he was attacked by Kalashnikov-wielding thugs in 2005 who fired at him 16 times, injuring him in the legs. Its a miracle I survived, he says. He thinks Bochkarev was behind it, while Bochkarev thinks Milov invented the whole story. In 2007 it was Milov who was convicted of assaulting Bochkarev–inside a courthouse, no less. They found drugs on Bochkarev, shrugs Milov, who the police report identifies as an Indeitsy associate. So you can think for yourself who is mafia.

Every charge thats been levied against Bochkarev, including the cocaine and gun counts, has ultimately been thrown out. I am sure that all the charges against Bochkarev were fabricated, says Sergei Kurt-Adzhiev, a well-regarded former editor-in-chief of Novaya-Gazeta in Samara, one of the few newspapers left in Russia still known for balanced investigative reporting. His problems are because he refuses to give up his business to Indeitsy.

The Samara police report goes into extraordinary detail on the Indeitsy mafia. It identifies the godfather as a 38-year-old man who goes by the nickname Vinnie–proof, knowledgeable locals say, that the thug watched too many Hollywood movies. Vinnies right-hand man–known as Koptel–was once an executive at the oil construction company to which Hess still subcontracts the majority of its pipeline work. Other top mobsters include Galeev (Galileo), Suslik (Gopher) and Gavnyuk (Sh-t­head).

Veimans nickname among mobsters? The One Who Wears Glasses. The report states that Sh-thead drives a Jaguar, practices law–and counts Veiman as a close friend. These lawyers work as Indeitsy couriers for transferring money to solve issues with the law enforcement agencies, it reads.

Echoing the report, a top police official in the Samara region who spoke with FORBES described Veiman as the financial director of Indeitsy. Indeitsy has a lot of connections in police and court and government structures, he says. Now Veiman works for Kukes in his company [the Hess subsidiary].

Veiman says theres a conspiracy to get him fired from Hess, where he apparently oversees all construction efforts. Hess investigated [the mob allegations against him] three times, including once this year, says Veiman. He adds that hes never even heard of the Indeitsy.

AS EVERY MAJOR WESTERN corporation knows by now, you enter Russia at your own risk–with the potential to wind up with vast riches or smack in the middle of corruption. Or both. A decade ago Paul ONeill, CEO of the then largest aluminum company in the world,
Alcoa
, refused to let his company invest in Russia because of corruption. (Alcoa moved in after he left to become U.S. Trea­sury Secretary.) The climate for positive business relationships has deteriorated substantially in the last ten years, ONeill now tells FORBES. I think Putin and Medvedev have, back-to-back, made Russia a less hospitable climate for investment for companies.

Some firms, like
Ford Motor
and
IBM
, seem to have achieved success there without a scandal; others, like Ikea,
Starbucks
, Daimler and
BP
, have seen their executives threatened with arrest, their companies raided or stolen or infiltrated by gangsters, their operations shut down. Still other firms, operating in a region they dont understand, choose just to acquiesce.

Where does Hess stand on this spectrum? Over the past year the local media have nibbled at the saga but werent in a position to solicit Hess side of the story. FORBES, of course, did. Asked about the companys apparent ties to the oil mafia, Hess spokesman Jon Pepper tells FORBES, On a regular basis our company audits operations around the world to ensure compliance with [our Code of Conduct] and all applicable law, often enlisting outside expertise. Our recent audit in Russia has not found any violations of the Code or the law. FORBES has learned that another Hess internal probe is under way.

For his part, Veiman tells FORBES that he now plans to sue the people who have been making allegations against him, including Bochkarev, who he terms mentally unstable.

Kukes, also reached on his mobile phone, said: Let somebody from Hess call me. I dont want to say something that can be used against us later.

Meanwhile, the violence continues. In November four men were arrested as suspects in an attempted assassination of Samvel Kanetsyana, a deputy general director of the Hess subsidiary, who was shot in the head.

As for Bochkarev, an appeals court finally ruled on May 5 in his favor, after all of the tax searches and audits. That same day a member of Russias national parliament (the Duma)–citing concrete examples of corruption–sent a letter to regional prosecutors in Samara imploring them to take the Bochkarev case seriously. Two months ago a new prosecutor was appointed for Samara, and theres some optimism hell get to the bottom of the regions corruption.

Im still wondering and amazed how Yuri can withstand all this pressure and how hes actually still alive, says his lawyer, Afanasyev.

Bochkarev shows no sign of caving in. The mafia has intimidated everyone, he says. Im a public person. I speak the truth.

Ive never been abroad–I was born here, and despite all the threats, I want to live here and do business here, he adds. They cant do anything besides planting stuff on me or falsifying claims. Or they can simply kill me. But they wont be able to break me.

CAST OF CHARACTERS

Alexey Veiman

A key executive at the Hess subsidiary; a top police official calls him the oil mobs financial brains.